Clare Nuttall in Almaty -

Top bankers in Kazakhstan expect the residential real estate sector to recover in two to three years time when demand will once again outstrip supply.

More than two years after the financial crisis hit Kazakhstan, the property market remains largely frozen. Prices have fallen by over 58% from their peak in spring 2007, but are still not low enough to convince people to buy. Banks have stopped or severely curtailed their mortgage lending, which has further discouraged house purchases.

According to Kazakhstan's statistics agency, in August prices for residential real estate in Almaty were flat (following an 8.7% decline in July) at $1,593 per square metre (sqm) for primary real estate and $1,381/sqm for secondary. The prices in Astana were also flat, at $1,126/sqm and $1,033/sqm respectively. The apparent halt to the declines is, however, most likely due to seasonal factors; real estate prices tend to increase in August when students arrive in the country's university towns. The consensus among bankers, therefore, is that the sector hasn't yet bottomed out. "We are not very happy about developments in the real estate market. We are hoping it will hit bottom, but the bubble has not yet burst fully," says Alexander Picker, CEO of ATF Bank. "People are not psychologically ready to reinvest in real estate, and neither buyers nor sellers are moving. According to our research, the sector will pick up in 2011."

Umut Shayakhmetova, chairwoman of Halyk Bank, also anticipates it will be some time before the residential real estate sector starts to recover. "We expect real estate prices to increase in two to three years' time," she said in an interview with bne. "The banks have frozen investments in construction, so when the economy starts to improve there will be an increase in demand and a shortfall in supply."

Signs of improvement

So far the only positive signs in the real estate and construction sectors are confined to the industrial and infrastructure segments. More hotels and office space are also needed. "There are some improvements in the economy seen in the construction sector that is limited to industrial and commercial projects, in particular road building such as the Western Europe to Western China project. The refining, processing, energy and communications industries have not suffered much. Nor has the mining sector, as it has also benefited from the devaluation of the tenge," Zareena Taimagambetova, executive director of Eurasian Bank, explains.

Halyk also remains interested in industrial construction projects, although it is no longer providing loans for residential real estate. "We are involved in industrial projects. We like projects such as new pipelines and factories, especially where there is state participation," says Shayakhmetova.

Meanwhile, in the residential segment, projects that were close to completion have received government funds, but many of those at an earlier stage have been abandoned. In Almaty, dozens of new parks have opened throughout the city, as bankrupt developers have been ordered by the city authorities to take down the metal hoardings around empty lots and they lack the funds to turn these areas into another use.

At the height of Kazakhstan's construction boom, between 2003 and 2007, some 7.3m sqm of outdated housing was torn down and 26.9m sqm was constructed, according to a report by ATF Bank. However, as the economy starts to recover, demand pressure will force a recovery in the market. Living space per capita in the country remains not only below European levels, but also lower even by Russian or Chinese standards. At just 17.2 sqm, the per capita living space is one-third of that in the UK and two-thirds of that in China. "After the current dip in residential construction will be over, catching up will resume," predicts the ATF report. "Potential forces to drive a recovery are improved affordability because of lower prices and higher incomes, restored profitability of construction companies because of streamlined processes and the market exit of some companies, reduced restrictiveness of lending by banks, and government support programmes."

Living space per capita actually fell in 2008, as the population has continued to grow while few new properties came on the market. Measured in US dollars, investment in residential real estate dropped 64% on year in January to May, with Astana and Almaty hit particularly strongly. But experts say the demographics alone will force a recovery of demand for residential property in the coming years. In April, the population stood at 15.8m, an increase of 4.7% over five years, and this is set to exceed 16m by 2011. This is due to a relatively high natural growth rate, plus immigration from neighbouring countries and by returning ethnic Kazakhs. The highest increases are in Astana, Almaty and South Kazakhstan.

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